Role of Gold in a Long Term Portfolio

Role of Gold in a Long Term Portfolio

Here is what you need to know

  • Gold is a controversial topic and there is a lot of misconceptions about Gold and facts that may surprise you
  • You may be surprised that owing Gold is Risky – it can be a very volatile asset on its own 
  • On top of that, Gold is prone to short term sell-offs during a crisis at exactly the same time as Stocks – this is due to market-wide liquidations 
  • However, Gold works really well within a diversified Portfolio and offers good diversification with no correlation to Stocks in the long term
  • Gold reacts well within longer periods when Stocks under-perform and will hedge your portfolio
  • Don’t get emotional about Gold and over-concentrate in Gold like some doomsayers/goldbugs would encourage you to do but treat it like an insurance for extreme risks 
  • While sub-optimal compared to Bonds as safe haven (outside of some unlikely but high impact events) low Yields may make it reasonable to consider Gold as a partial alternative. Here is why.

The Ultimate Currency

A Bloomberg Terminal used by Bankers and colored asset classes on its keyboard
bloomberg terminal - gold price
bloomberg terminal keyboard gold as currrency
  • Gold is a currency and a commodity (to a marginal degree)
  • It’s a controversial asset – some Finance people I know avoid it while a lot of traders allocate a substantial amount of their savings to Gold. It can get emotional. People in banking are pretty rational, unless you talk to them about Football or Gold
  • For the Finance community it’s a currency, the ultimate currency. In fact Financial Analysts using a Bloomberg terminal must enter ‘Currency’ after typing the Gold ticker to get information about it or its latest price
  • Aswath Damodaran, one of the most respected academic asset valuation researchers summarized it follows: “Gold’s value has more to do with its longstanding function as a store of valueespecially during crises or when you lose faith in paper currencies, it is more currency than commodity
  • Gold is also a commodity as technology companies use it in industrial processes – but the demand is marginal.  According to the World Gold Council’s data, it accounts only for about 17.5 percent of the total demand for gold

Gold's historical value comes from difficulty of acquisition

Of all the literature related to Gold, Joe Weisenthal, from Bloomberg has in my opinion one of the best ways of summarizing historical importance of  Gold. Here is his take.

One of the striking things about gold is just how incredibly hard it is to attain (and hold onto once you have it) and the different things you have to master to get gold

To get Gold you:

  • Have to be good at warfare
  • Be able to marshall an extensive human workforce to mine it
  • Mastery of global supply and logistics routes
  • Be able to command guards who will watch your gold, and not steal it
  • Have the technical know-how to get gold out of the ground, which is expensive and

When you have gold you’re communicating all the different things you’re capable of (mastering supply routes, commanding an army, scientific endeavor, marshalling labor, etc.)

Gold, then, is a very specific proof of work. If you can get gold, you’ve proven that you have the ability to run a state or some state-like entity

As with all currencies, Gold has no yield on its own

  • Unlike bonds, gold does not pay interest or dividends
  • This perceived lack of yield often deters some investors
  • It also does not have credit risk 
  • You also need to account for storage costs

The Bad - Gold is Risky

How volatile is Gold?

  • Despite popular safe haven belief Gold is inherently risky – especially for people that don’t diversify enough and have a high concentration of their wealth in Gold 
  • On its own, Gold is a volatile asset – in fact, if held for 5 years you could still have faced up to a 40% loss on several occasions over the past 3 decades
  • The below graph illustrates Profit / Loss for $1000 invested in Gold and held for 5 years

If the stock market crashes will Gold go up?

Not necessairly in the short term. You can see that there is a short term sell-off period for Gold in the middle of the 2008 Crisis (circled in yellow below) – despite its safe haven status liquidations of assets have short term impact on Gold.

However, Gold acted as a great long term Equity hedge during the GFC. It has returned up to 280% in 2010/2011 if bought 5 years earlier and held for that same 5 year period.

In the long term, more often than not a crisis comes with at least one of 5 the risk factors (appendix), acting as positive catalyst for Gold prices. 

It is frequently deflation, expectations of high inflation and/or a weaker Dollar.

Net Profit & Loss at the moment of sale on $1000 invested in Gold 5 Years earlier (5 Year Holding Period)

The Ugly - Gold can underperform for decades

Is Gold a good investment for the Long Term?

  • In short, no. In fact, I think it’s a stretch to call it an Investment, similar to other currencies. I would rather call it a diversifier. 
  • Price moves are of course even more extreme if you invested at the top of the market. It’s a great way of looking of what losses you can sustain, if looking at Gold in isloation – even in the long run. Below is the graph representing scenarios where you would have invested at (Gold) market peaks.
  • The below graph gives you a long term perspective on how Gold can have decade(s) long under-performance, starting in 1980s when Gold peaked 
  • It subsequently recovered from 2000 onwards and peaked again in 2011
  • Recently, Gold has rallied since mid-2018
Lost decade(s) - Net Profit & Loss on $1000 invested in Gold from its previous market peak
gold drawdowns since end of gold standard 1973 2020 in USD

The Good - Gold in a Portfolio works well

Does Gold have a place in a Long Term Portfolio?

  • Gold provides good diversification benefits – only inferior to Treasuries but if Yields are low, holding Gold (or Bitcoin) has low opportunity costs
  • While Gold is volatile on its own, within a portfolio with Equities and Bonds, a small allocation may improve the risk/return profile of your portfolio
  • There were/will be scenarios where other asset classes will underperform and you may then use sale proceeds from Gold to purchase other cheaper assets that generate yields/dividends
  • Gold may help you to rebalance your portfolio in a certain crisis scenarios but this may not be as immediate as Bonds due to market-wide asset liquidations
  • Read what diversification means and how to read the below table
Gold Portfolio Diversification Benefits 1999-2019

Here is a guide on how to select assets for your portfolio. Simplify your portfolio by following these allocation strategies to improve performance and time you need to dedicate to portfolio management. Understand how to clean up your portfolio from asset classes you don’t need.

In combination with Bonds

Can Gold replace Bonds in a Portfolio?

Net Return on $1,000 from a 70% International Equity Portfolio and 30% Gold or Bonds over 5 years at time of sale (5 Year Holding Period)
  • The above chart represents a return in USD (before fees) from holding a 70% Equity 30% Bonds or Gold Portfolio over 5 years time at the time of selling the investments (assumed 5 year holding period)
  • Bonds provided better overall returns up until the Global Financial Crisis but since then Gold resulted in higher Portfolio returns
  • Remember, that Gold is much more volatile (15% Risk as measured by standard deviation vs. 3.5% for Bonds) and your overall portfolio risk in the example above increased as well 
  • It confirms that you should have both Bonds and Gold in your portfolio since the protection benefits do not kick in at the same time depending on type of market events 

Here is a guide on how to construct a Long Term Portfolio to reach your goals e.g. Financial Independence, Retire Early 

But why is Gold so volatile?

You don’t have to understand the technical details to be able to benefit from Gold – in fact diversification is all that matters.

However, it’s good to have an understanding of what really makes it a different asset and when you may need it (of course, I assume that no one can get the timing right).

Here is why it’s not as safe as often perceived. 

But also why owning it makes sense.

The first four factors are predominately Financial and fuel the c. $100 bn in daily trade volume out of which most is traded in London as a financial product

"If you don't own gold...there is no sensible reason other than you don't know history or you don't know the economics of it"

Ray Dalio

Appendix - THE 5 Gold Price Drivers

#1 Opportunity Cost

What is opportunity cost of holding Gold?

30 %
of Gold price moves can be explained by Real Yields – the strongest factor, by far

Low Real Interest rates is the elephant in the room when it comes to explaining what drives most of Gold price

Investors are turning to gold because of one simple fact – deeply negative Real Yields (Treasury Bond Yields after accounting for Inflation)

The more Treasury Bonds are generating negative real returns the more attractive Gold becomes. After all, buying a bond that is guaranteed to lose you money is a tough sell

Gold price has moved in line with Real Interest Rates for more than a decade
real rates gold correlation 5 year real yields and XAU - FED - ETF Index Investing
Is now a good time to buy Gold? Gold prices have moved in line with real yields which means Bonds vs Gold is a yield opportunity cost problem

According to a BlackRock analysis Real Yields explain around 30% of the price of Gold – the strongest factor, by far. But it is not true in  all environments when other price drivers take over

We could break it also down into three periods: 

  • 1982-1999 (High Real Yields)
  • 2000-2008 (Decreasing Real Yields) and
  • 2009-2019 (Low Real Yields)

In the first two periods when Bonds offered positive / high real returns there was little or low relationship between Gold and Real Yields (it may be the case again if Real Rates go up one day)

That said, in the current low yield environment there is clearly a strong correlation between rates and Gold prices

Gold follows Real Yields closely

BlackRock estimates that a rule of thumb is that every 0.10% drop in Real Yields coincides with about a 1.25% increase in Gold Prices. Real Rates are already low hence any potential coming from Rates is by definition limited

1.25 %
Is the increase in Gold price for every 0.10% drop in Real Yields

How do I track opportunity cost of holding Gold?

You can easily track daily Real Rates from US Department of Treasury website or the FED – the lower the rates the lower the opportunity cost of holding Gold (and higher its price)

#2 Dollar strenght

Why does Dollar strenght impact Gold Price?

This reason is mechanical – Gold is quoted in US Dollars

  • Thus, historically Gold outperformance is strongest when the Dollar is down. It’s valid over long periods of time. During Coronavirus both the Dollar and Gold were perceived as Safe Havens and a stronger Dollar didn’t have a major impact on Gold. This may revert as the Economy stabilizes.
  • Monetary Inflation increases prices of all assets including Stocks and Gold on the back of unprecedented stimulus by the FED which will make the USD relatively weaker (Price inflation of Real Assets since these are quoted in USD)

How do I track Dollar strenght?

You can easily track USD Strenght vs major currencies (predominately the Euro) by following the Dollar Index (DXY)

Essentially, this tracks how strong is the USD versus a basket of other currencies.  A stronger Dollar vis-a-vis other currencies may mechanically weaken Gold

#3 Macro Shocks

As you may have observed during the COVID-19 Crisis, each Jobless claim on Thursday came with a surge in Gold Prices

Other Economic indicators have similar effect. Gold may ultimately react negatively to a more positive outlook.

Any potential geopolitical or Economic Conflict (e.g. Escalation of Trade War with China) may also impact Gold and provide a hedge to your Equity portfolio. 

There is also a possibility of other Tail Risks combined with current situation (remember how the Oil Price War escalated quickly). We just don’t know but Gold is an Insurance in these instances 

#4 Very High Inflation

How high must the inflation rise to benefit Gold?

Gold performs well is sub 1% or above 3% Inflation

In terms of inflation regimes, average Gold returns have generally been most significant during extremely low (less than 1%) or high (greater than 3%) inflation. 

Is it a good time to buy Gold with inflation between 1% an 3%? In those episodes gold returns were lackluster (pun intended)

"I hate gold and I have always hated gold. Unfortunately, I own gold. I think I have two fears. One fear is deflation and one fear is inflation and I have learned through history that there is no such thing as inflation anymore. There is hyperinflation or nothing. Now we are in a deflationary environment. It can switch very easily from there because there is so much money out there. So I want to hedge and make sure my funds and my savings are unaffected by both deflation or hyperinflation"

Nassim Nicholas Taleb

When the 60 Stocks / 40 Bonds Portfolio doesn't quite work

  • The real price of imported oil in the U.S. increased 6-fold in the 1970s, leading to runaway inflation and stagnant economic growth. 
  • Initially, stock-heavy portfolios were hit the hardest, declining up to 50% within 18 months
  • Later, as inflation accelerated, bond-heavy portfolios suffered as well, declining up to 40% by 1981 (inflation adjusted chart below)

Note that I used a separate axis (right) for Gold since it is so much more volatile compared to Bonds and Stocks (acts like an option aka insurance)

Oil and Inflation Shocks of the 1970s

In essence, we would need to see a significant jump in inflation for Gold to benefit materially. 

This has also not been the case post the GFC – when gold has been frustrating to trade. The prediction that drove the post-crisis rally — that quantitative easing would lead to high inflation — did not play out. Gold tumbled to below $1,100 by late 2015. Bears can also point to the two-decade slump that followed a high in 1980.

How do I track Inflation Expectations?

One of ways of tracking medium term inflation is using FED’s 5 year breakeven inflation rate

This graph will show you the expected annualized inflation over the next 5 years.

#5 Commodity, Retail and Central Bank Demand

Gold has a traditional supply / demand market as commodity (technology) in Jewellery or protective asset demand from Retail / Central Banks. Demand for Jewellery may currently be the weakest aspect of current Gold appeal. This aspect is largerly driven by Emerging Countries and more specifically Asia (50% of overall Gold demand comes from China and India)

Despite initial signalling Emerging Countries’ Banks are likely to continue the long term trend for central banks to be net buyers of Gold post GFC

How do I track World Gold Demand?

One of ways of tracking demand is through the World Gold Council website and its quarterly reports


Research the appropriate ETFs based on your needs

  • If you decide to invest in Gold you may consider physical gold or Gold ETF
  • Only consider Gold in a diversified Portfolio (Read how can Gold fit in a Long Term Portfolio))
  • I have done some research for you and the Largest Funds are listed below
  • An investment in gold is easily done with listed products, like ETFs or ETCs (How are they different?) These investment products track the spot gold price closely, after taking management fees into account
  • Performance vary by currency (Gold is quoted in USD and then converged into local Fund Currency)
  • I have not included leveraged Funds (understand their risks)

Gold ETFs by Exchange Listing

  • Check the size of the fund and liquidity – it is usually preferable to stick to the larger vehicles that are more liquid (why liquidity matters)
  • Low fees are the most cost-effective feature of an ETF – make sure you select a low fee vehicle. Check the expense ratios from our dashboard or the ETFdb website and plug them here. You can compare the effect of fees on your overall returns using my ETF fee calculator. You may be surprised of the high impact
  • How is the purchase or sale of an ETF going to affect your tax return? While U.S. based ETFs have many tax advantages, a foreign ETF may not be so tax-friendly and therefore not cost-effective. Tax implications vary from region to region
  • Verify any commissions and fees charged by your broker


  • Dirk G. Baur, ‘Gold – Fundamental Drivers and Asset Allocation’, University of Western Australia (2013), Available at SSRN
  • Jeffrey F. Jaffe, ‘Gold and gold stocks as investments’, (1989), Financial Analysts Journal 



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All information found here, including any ideas, opinions, views, predictions expressed or implied herein, are for informational, entertainment or educational purposes only and do not constitute financial advice. Consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate. Read our full terms and conditions.


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About Raph Antoine 83 Articles
Raph Antoine is a Portfolio Manager and Institutional Advisor that witnessed first-hand the 2008 Global Financial Crisis and the 2011 European Debt Crisis working for some of the most prestigious names in the financial industry. Raph has experience across multiple asset classes including Fixed Income and Equity products as well as Special Situations and Restructurings in multiple jurisdictions. Raph holds an MSc in Financial Engineering and is a CFA (Chartered Financial Analyst) Charterholder. He usually rides one of his two bikes. Rarely, a Canyon Ultimate CF SLX 8.0 (that is currently in family's attic) and most of the time a Gravel Pinnacle Arkose (his favourite) that he used to Cycle the World.
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Matt | Financial Imagineer

Dear Raphael, thanks for this excellent write-up, enjoyed it a lot!
Am working with goldminers on my side, usually the ETFs to diversify from single company risks.

Will bookmark your post for future reference.

It’s literally GOLD!

Cheers, Matt

Matt | Financial Imagineer
Reply to  Raph Antoine

Dear Raph,

Correct, I’m able to hedge about the same notional exposure by only using about 1/3 of my capital. So, the asset allocation can get streamlined this way.


1 year ago

An excellent summary for someone considering the pros and cons of Gold within portfolio. There’s a lot of contradictory info out there and you don’t over-simplify it. Thank you

1 year ago
Reply to  Raph Antoine

Would you recommend currency hedged ETCs? Or does that defeat the point given the additional costs and anyway high volatility of gold? You say that gold is anyway sensitive to the strength of the dollar, so even with hedging, one would anyway be exposed to a significant amount of currency risk? Thank you

11 months ago

Dear Raphael, thanks you for all the excellent information you provide on this webiste. I just started investing this year, after a few months of research. What I came upon a few weeks ago is the Golden Butterfly portfolio (a modified version of Harry Brownes Permanent portfolio). My investment horizon is very long (I imagine 15-20 years), so I think I should adjust it to have more in stocks. However, I know you don’t give specific advice so I won’t even ask. I just wanted to know your general opinion on the Golden butterfly, if you would be kind enough… Read more »

10 months ago

Hi Raph,

I guess that your perspective on gold is rather long term (despite disclosure that at given time you had ca. 15% in gold) but I’m curious on your opinion on Bridgewater decision to reduce Gold by 45%? Change of strategy (expectation that interests will go up) or just realization of profit? For me it is quite interesting given that Ray Dalio was labeled as gold promoter (not really in my opinion).

10 months ago
Reply to  Raph Antoine

Good point. Forgot that their allocation is based on risk parity. Still this looks interesting, especially that they did some research on bitcoin and surprisingly they see some pontential (many caveats applied).

I’m on my way to simplify portfolio and replace gold as our local TIPS for individuals are quite good i.e. 10 years, Principal + Interests of 100 bps. adj. by LTM CPI (never lower than 100 bps) and interests are accumlated (can sell any time but -2%, no more than accumlated interests).

10 months ago
Reply to  Raph Antoine

Guess that is kind of curiosity from your side but maybe someday you will impress somebody with knowledge how TIPS for indivduals in Poland works 😉 10 years Price / Face Value 100 PLN (no charges / no fees) Interests of 1,7% in first 12 months Interests of LTM CPI + Margin of 100 bps for next periods In case of deflation 100 bps (yes, coupons are floored at 100 bps) Interests are accumulated Can sell anytime but you have to pay 2 PLN per bond (2%) but no more than accumulated interests Capital gain tax at the end There… Read more »

Last edited 10 months ago by Maciej
10 months ago
Reply to  Raph Antoine

Thank you for your comment. Just last question. You mention that you have increased cash position (partly replacing bonds & gold). You have moved to notes/t-billls o really hard cash?

After simplification I do not want to change my portfolio (plain vanilla 70/30) but as valuation are high I want to just reduce contibutions and also considering different options (incl. hard currencies and mortgage repayment).

Maybe someday you can write an article on bonds „alternatives” i.e. future pension payments, mortgage/debt repayments etc. and how to account for them in portfolio 😉

Accidentally Retired
9 months ago

Great write up. Really helpful. I think I will add a bit of gold to my portfolio for diversification, but it’ll be minimal. Cheers!

Dividend Power
9 months ago

Gold is something that I have never really invested in. But I guess it can be hedge against inflation. But does BTC serve that function now?

9 months ago

The permanent portfolio recommends having access to physical gold, and specifically recommended ZGLD for EU investors. What are your thoughts around this and would you add it to your recommended list?

Last edited 9 months ago by Hermy
8 months ago

Hi Ralph, thanks for this comprehensive and well written summary. I may allocate a small percentage in the future to diversify my portfolio a little more. Would I be correct in thinking it would provide a potential hedge in the event of Sterling falling?
Have a good weekend??

6 months ago

Iteresting pieces on gold and sequence risk i.e looks that gold also hedge sequence risk during portfolio consumption:

Last edited 6 months ago by Maciej